A Market Microstructure Analysis of Foreign Exchange Intervention in Canada
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 02-16.
Length: 74 pages Abstract: This paper clarifies the role and the impact of foreign exchange dealers in the relationship between foreign exchange intervention and nominal exchange rates using a unique dataset that disaggregates trades by dealer and by type of trade. The paper tests a number of market microstructure hypotheses. Results suggest that central bank orders and other customer orders are treated similarly by dealers who are engaged in short-run speculative and risk-sharing-motivated interdealer trading. While private payoff-relevant information is contained in trades, speculative interdealer trading is based only on transitory non-payoff-relevant information. A central bank considering intervention must consider both the signal it wishes to convey to the market and the subsequent trading strategies utilized by dealers.
Date of creation: 2002
Date of revision:
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Exchange rates; Financial institutions; Financial markets;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-07-04 (All new papers)
- NEP-FIN-2002-07-04 (Finance)
- NEP-FMK-2002-07-04 (Financial Markets)
- NEP-IFN-2002-07-04 (International Finance)
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